Profit on the Long Way Down From the Apple (AAPL) Tree

An approach to the $440 level puts AAPL between a technical rock and hard place

By Trader X | Feb 27, 2013, 7:57 am EDT

Tech giant Apple (NASDAQ:AAPL) has been knocked around for about 160 days or so since peaking just above $700. Since then, the shares have given up more than $250 per share for a decline of about 37%, but is that enough?

Click to Enlarge Interestingly enough, the charts are telling us “no”. Just as perfectly as the stock followed support trends on the way up, the shares are now just as sensitive to overhead resistance from the same technical trendlines on the way down. Unfortunately for the AAPL bulls, those trendlines (as well as a few other technical tricks) are forecasting that the next move for AAPL should be to the $400 level, racking up another 10% decline for this former Belle of the Bulls.

At the time of this writing, AAPL was breaking through the $440 level, a significant technical price according to the charts. This break lower is happening after an unsuccessful attempt to break back above the shares’ declining 20-day moving average. The declining trendline’s approach of the $440 level puts the shares between the technical rock and hard place, forecasting a significantly high probability that the shares will break into another layer of selling in the near-term future.

Among the other catalyst for lower AAPL prices is the trickle of downgrades and lowering of price targets by Wall Street Analysts over the last few months as the company tries desperately to break news on a new product or other flash of innovation that would pose the stock worthy of the “growth stock” status over the “value” play that it appears to have slipped into.

For now, traders should prepare for the pending decline, as AAPL will likely dig itself lower before the long-term investors really consider it a real fundamental value.

Recommendation: This means those holding AAPL shares may want to consider selling them (or buying protective puts on them to hedge the downside).

More aggressive traders may consider the April $430 puts (AAPL130420P00430000), currently trading for less than $15.00 per contract, as an effective short on the stock. A move to the $400 target could net a profit of more than 100% on these options as the intrinsic value would be worth $30 alone.

Given the trend in AAPL shares, we consider the fact that the shares’ 50-day moving average is declining rapidly as an insurance policy for this outlook. The shares could rally to the 50-day, currently at $489, but would likely see selling pressure increase at that price. Given this, we would use a break above this overhead technical as an exit for the put option.

Trader X frequents national investment conferences and has developed several market analysis tools that harness the powerful combination of behavioral analysis and technical analysis. He has decades of experience as a registered broker.

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